S&P's decision to hold India rating for 2 yrs hits Modi govt where it hurts the most

In a major set back for the Narendra Modi government, which came to power promising a quick turnaround of economy and jobs, global ratings agency on Wednesday said it is retaining its rating for the country at BBB-, with stable outlook, depsite the government's best of efforts urging the company to revise upwards the ratings. This is the lowest investment grade rating.

What came as a bigger shock was S&P's assertion that the rating for the country is unlikely to change for two years.

Reuters

The government has reacted with anger. Department of economic affairs secretary Shaktikantha Das at a press conference said the rating agency should do introspection for not upgrading India despite unparalleled reforms anywhere in world. He also said there is disconnect between investors' thinking and rating agencies and also promised to continue taking measures necessary to strengthen the economy, boost GDP growth and create jobs.

Here are the key facts of the development:

What did the rating agency say?

1) A rating constraint is India's low GDP per capita, which we estimate at
US$1,700 in 2016.

2) We believe domestic supply-side factors will increasingly bind economic performance, and the government has little ability to undertake countercyclical fiscal policy given its current debt burden.

4) The country's fiscal challenges reflect both revenue underperformance and constraints on expenditure.

5) Although we expect the administration to pursue medium-term fiscal consolidation, we foresee that planned revenues may not fully materialize and subsidy cuts may be delayed.

6) The stable outlook balances India's sound external position and inclusive policymaking tradition against the vulnerabilities stemming from its low per capita income and weak public finances.

7) But the rater has also given credit for the government's efforts. It said the NDA government has made progress in building consensus on a passage of laws to address long-standing impediments to the country's growth. These include comprehensive tax reforms through the likely introduction in the first half of 2017 of a goods and services tax to replace complex and distortive indirect taxes. Other measures include strengthening the business climate (such as through simplifying regulations and improving contract enforcement and trade), boosting labour market flexibility, and reforming the energy sector.

8) Despite all this, the agency has said that it does not "expect to change our rating on India this year or next, based on our current set of forecasts".

What did the government say?

Talking to reporters after S&P Global Ratings' issued the statement, economic affairs secretary Shaktikanta Das said: "If the rating has not been improved, it's a matter which doesn't bother us so much. It's a question which calls for an introspection among those who do the rating."

According to him, global investors feel India is highly "under-rated". "There is a disconnect, therefore, between what the investors are thinking of, what they have in their mind, and (what) the rating agencies are concluding. I think somewhere there is a disconnect," he said.

"If you compare the various factors which the report itself talk about, is there any other economy that equals this? So with all this, if there is no improvement, I think it's a matter for the rating agency itself to put a question to itself and perhaps undertake a kind of introspection," Das said.

Why is the government worried?

The rater's assertion that it will not raise the rating has hit the govenrment where it hurts the most.

In every international forum possible prime minister Narendra Modi has marketed India as the most investor friendly country. Listing out his acheivements, he has insisted that he has turned around the country's processes. A rating upgrade would have supported his arguments.

Apart from this, a fairly large amount critics still believe the prime minister has done nothing much to improve the economy. The schemes that he has launched are just a rehash of the one the UPA-2 had rolled out, they say. They feel the government is doing a fine job of managing the headlines. Had an upgrade come now, it would have served to shut the mouths of these 'naysayers'.

Also, S&P's statement closely follows Moody's, which also made somewhat similar staments about the country in September. "We have a positive outlook on India. On balance, the risk is on the upside. We are continuously monitoring the rating. We see pressure building up in 1-2 years and any tangible change could bring about a change in rating," Moody's Sovereign Group Senior V-P Marie Diron had said. Moody's has a 'Baa3' rating with a positive outlook for India.

It is to be noted that both the raters had accorded the low ratings during the UPA regime because of the then prevailing policy paralysis and global situation. while Moody's accorded the Baa3 rating in August 2011, S&P's low investment grade rating came in April 2012. The only change they have made in the last 4-5 years is in the outlook. While S&P changed the outlook to stable in September 2014, Moody's did it in April 2015.

It definitely pricks the NDA government that despite pitching for an upgrade many times with the raters, they have not obliged and the rating continues to be the one that the country got under the UPA. Unless the rating changes, Modi cannot claim a complete break from UPA's past. And this indeed is painful and explains the shocked reaction from the government.

However, with S&P ruling out any upgrade for two more years, the NDA government seems to be running out of luck on this count.